Shares of Pandora Media (P) are on the rise after Oppenheimer analyst Jason Helfstein upgraded the stock to Outperform, a buy-equivalent rating, saying that a merger with Sirius XM (SIRI) makes sense. This follows media reports suggesting the latter is interested in acquiring Pandora, which is now said to be open to selling itself.

COMBINATION MAKES SENSE: In a research note to investors, Oppenheimer's Helfstein upgraded Pandora to Outperform from Perform with an $18 price target. The analyst pointed out that he believes a combination with Sirius XM makes sense at $18-$21 per share. Helfstein sees "significant" demographic and operating synergies between the two companies and views a Pandora buyout as a "legitimate possibility" following press reports indicating Sirius has renewed interest. Moreover, the analyst noted that Pandora seems to have negotiating leverage, as Sirius XM does not have an on-demand offering and its pricing is above the market. Additionally, in-car data plans threaten Sirius XM's value proposition, he contended. Further, Helfstein pointed out that Pandora's demographic profile appears to be "just right" for a takeout given its users skew younger than Sirius XM, but older than competitors Spotify and Tidal.

DEAL DILUTIVE TO EPS: Also commenting on the press reports of Sirius XM's interest in acquiring Pandora, Morgan Stanley analyst Benjamin Swinburne told investors that he would expect an offer price in the $15-$20 range, were a transaction to occur. The analyst noted that Pandora would bring Sirius XM a product offering for the majority of U.S. households that will never pay for music, a local ad sales force selling growing digital audio inventory, and a long-term scale position in the streaming business. However, Swinburne pointed out that Pandora's lack of near term profits implies that under almost any structure it would be dilutive to near-term earnings per share for Sirius. Nonetheless, he acknowledged that Pandora's net operating losses allow for a more favorable free cash flow/share impact. The analyst reiterated an Equal Weight rating and $4.80 price target on Sirius XM's shares.

PRICE ACTION: In morning trading, shares of Pandora have gained about 1.5% to $13.59, while Sirius XM's stock has risen about 1% to $4.37 per share.